Cost disease, wages and skills

Cost disease is often cited as an economic phenomenon that poses particular challenges in the arts, especially the live performing arts.

In a nutshell, here is the theory: productivity is defined as the value of output produced per worker. Rising income over time depends upon rising productivity: if the economy is not producing more output, it cannot earn higher incomes. We earn more per person than our grandparents did because we produce more. Productivity has risen over time because we have more capital stock (machines and buildings and infrastructure) to work with, we are (on average) better educated, and we have new technologies, the latter of which turns out to be the most important in explaining growth in developed countries. But productivity growth has varied a lot across sectors. Mechanization and new technologies have meant that the output produced per worker in manufacturing, in agriculture, and in transportation, has risen very rapidly over the years. But output per person in sectors where there have not been major changes in technology or labor-saving capital has not risen so fast – think education, many aspects of health care (yes, there have been great advances in medicine, but we still need a lot of workers – nurses, physicians, technologists – to deliver health care), and live performances. Because each sector has to offer wages competitive enough to attract skilled workers, the average wage tends to rise in all sectors even if major productivity growth is only in some sectors. Cost disease is defined as the pressure on organizations in low-productivity-growth sectors arising from rising wages across the economy. Elementary schools, health clinics, and orchestras are all faced with rising wages for workers who do not have rising output.

I have never liked the term “cost disease”, because it is an obviously negative phrase used to describe what ought to be celebrated: average levels of productivity, and in turn average wages, are rising! We are getting richer (put aside the current recession and think of very long term trends). We have more income that can be used to pay for increasingly expensive schools and health clinics and orchestras (just as we find manufactured goods and transportation becoming relatively less expensive over time).

But it all depends on what people want to spend on. Hair stylists are a “cost disease” sector – not much labor-saving technological change there – but they stay in business (even as our grandparents say they cannot believe what they just had to pay for a trim) because most of us find it worthwhile to go to a stylist rather than getting some relative to cut our hair, or to do it ourselves. And I think this leads to the interesting question: if there are a lot of “cost disease” sectors, which ones remain vibrant, and which really do begin to show signs of, well, disease?

A column today by Peter Orszag (discussed by Tyler Cowen and by Matt Yglesias) reports on research that shows there may be a decline in the economic value of a college degree. More and more bartenders, firefighters and cab drivers have a degree, such that skills obtained in college are not really being put to use. One theory is that to an increasing extent jobs that once required certain levels of cognitive skills are being either outsourced or automated, and an excess supply of people with those skills has led to some of them moving “down” the economic ladder into jobs once held mostly by those without college degrees.

But there are skills, and there are skills. Yglesias asks “what are the skills for which there is no technological innovation that could replace them?”. His answer is any job where customers really, really want to deal with a live person (his example is the instructor for the spinning class at your local gym: a recording could be used to lead the class but customers don’t want that – they will pay the price for a live class leader). The skill that can’t be replaced is the personal – how to get along with customers, communicate in a friendly way, lead them to enjoy the live experience. These are not skills which are not necessarily gained in a college degree.

And now for a sweeping statement about live performance. There are technological substitutes. We can listen to recordings (which over time have come available at lower prices and higher sound quality) instead of going to a live concert; we can watch television (ditto) instead of attending a play. Live music and theatre do have cost disease, and the means of survival for these live arts is to provide an experience that people really want to have, for which the electronic substitute is sometimes just not enough. The problem is not that audiences can no longer afford to attend the symphony or the theatre. Remember, cost disease only exists because incomes have risen. The problem is whether that is where they want to spend their money; something about the live-ness of the event has to make it worth it.

Comments

We need to leave behind the large, industrial scale repertoire of the 19th century when labor and even human life were cheap. If we create new genres to match our own world’s needs and practices, the cost disease could be solved.

From that perspective, the cost disease will be solved by artists – and much less so by administrators. We need to create works in line with modern technologies and labor practices. As one example, we do not have a genre of chamber music theater even though composers have been trying to create it for 500 years. Small music theater in 500 seat venues could come closer to paying for themselves than opera.

Another solution is to not let the marketplace be the sole arbiter of human endeavor – an almost incomprehensible idea for Americans. Here in the Black Forest where I live, there are nine fulltime opera houses within two hours, all publically owned and operated. Seven of them are in cities whose populations range from 76,000 to 200,000 so their opera houses are small. In Lucerne and Pfrozheim they seat about 500 people and perform just about all year. Opera is one of the most visceral of art forms. Experiencing all that vibrating flesh and pageantry up close is an incomparable experience. And the tickets are very affordable. For 50 bucks I can be 50 feet away from the singers.

Or should we take the American approach and let the marketplace decide? The USA only has 3 cities in the top 100 for opera performances per year. Shall we let opera go because it doesn’t belong in the market?

The Met is privately funded and seats 3800 people. The tickets are on average four times more expensive than here in Europe. If most people are in seats they can afford they have to watch through binoculars to see any detail. And the immediacy of the vocal experience is also largely lost. The Met’s video broadcasts end up being a better experience and this is cannibalizing the public that buys tickets for the live performances. Even with a former Sony executive running the Met, it will still be doomed by the internal contradictions of trying to situate opera in the marketplace. Perhaps arts administration should be taken out of business schools and placed in departments that deal with public administration. Then we could stop trying to force square pegs in round holes…

Thank you for your comment. Two issues are raised.
The first is that cost disease can be solved by developing works that need fewer people to perform. While it is true that a response to cost disease can be to work with fewer performers – and there is evidence that new plays have used ever smaller casts over the decades – it doesn’t quite solve the issue. A chamber orchestra costs less than a full-sized orchestra, but the chamber orchestra still has cost disease, it will still become increasingly expensive each year as wages rise. Think of my example of the barber: there, the workforce has been reduced to a single person doing the task. But cost disease persists.
The second issue is to not ‘let the marketplace decide’. Now, whether opera ought to be privately or publicly funded is a worthwhile debate. But cost disease will persist, even in a completely publicly-funded company. A public funding model doesn’t solve cost disease, it just gets the taxpayer to finance the increasing costs rather than audiences and donors.

Thank you for the explanation. From that perspective, small forms and public funding would at least alleviate the symptoms of cost disease. (Assuming it’s a disease to pay musicians middle class salaries.)

For an alternative perspective, perhaps the actual cost disease was 19th century forms of capitalism that included exploitation ranging from child labor to plantation slavery to share cropping. Opera is no problem when musicians are paid a nickel a day. What we are seeing now is the gradual cure of that disease. People who perform services are allowed to be part of the middle class. Art and its funding must follow suit. Operas, orchestras, and funding by the wealthy are all 19th century concepts carried into the 21st. Our disease is a lack of artistic imagination that cannot formulate a workable cultural, social, and economic identity.

“For an alternative perspective, perhaps the actual cost disease was 19th century forms of capitalism that included exploitation ranging from child labor to plantation slavery to share cropping.”

William, that kinda misses the point. The Cost Disease (really an unfortunate and loaded phrase to use for the economic phenomenon) is simply a productivity lag phenomenon that happens in an labor intensive industry. It’s not historically specific, and no particular historical economic infrastructure defines it–what defines it is simply the difference between the rising wages in high and low productivity industries.

For example, almost no one associates the Cost Disease with the Sports Industry, mainly because most people think that Sports is a money making machine. But the Cost Disease affects it in precisely the same manner as it does the Performing Arts and the Popular Music industry. Hence we get rising wages and rising ticket prices far beyond the what simple inflation would predict.

Most people don’t realize also that, for example, the NFL (the most profitable of all the Sports Leagues) has the lowest proportion of audience revenue to total revenue, about 20%, than all the other Leagues. This is also far lower than the audience revenue to total revenue than we find in the arts. The Sports Industry has simply mitigated the effects of the Cost Disease with high revenue through broadcast licensing and merchandise sales. But that isn’t going to work forever either.

Fortunately, as Baumol stated in his most recent book about the Cost Disease, we can easily afford all these low productivity services (i.e. Education, Health Care) simply because rising wages in conjunction with the lowered costs of high productivity industries means we have far more disposable income. The problem is getting folks to use that disposable income on, say, the Performing Arts.

From another perspective, the issue is indeed related to the rising costs of labor. If the cost of labor had not greatly increased over the last 150 years, productivity lags would not be an issue. If technology hasn’t increased efficiency, no problem, just hire more cheap labor. If orchestra musicians, for example, were still paid what they were 100 years ago, orchestras would be so cheap they wouldn’t have significant cost disease. In other words, cost disease is directly related to not only to increases in productivity due to technology, but also to rising labor costs.

This is why outsourcing has evolved. Technology or not, cheap labor alleviates cost disease. In reality, high quality artistic labor is not cheap, so most people cannot afford to see things like opera unless it is subsidized by the government.

Yes, that’s the problem–the rising cost of labor is necessitated by the increased productivity in non-labor intensive fields. Baumol has used his Cost Disease to advocate government subsidy in the arts. Alan Peacock (an economist and composer/musician in the UK) has argued for a type of voucher system to mitigate those rising costs. I’m not sure that either one is an ideal solution, but the alternative is trying to convince the public that they should be spending more of their rising discretionary income on the arts rather than on, say, Sports or Movies or Popular Music.

The thing is all of those other industries are also seeing a sharp decrease in live attendance and some of that is because of the other side of the increased productivity, namely how cheap home entertainment systems have gotten which makes home viewing increasingly cheaper and more enjoyable. It’s the side effect of what Michael stated in the piece about giving away tickets, the secondary costs of going to a live event becomes the bigger hindrance to attendance.

Is it the musicians that are the “cost disease” problem? Or is it the administrators who are paid several hunderd thousand dollars per year at major orchestras? Or is it the conductors who receive million dollar plus contracts for part time work?

I doubt that Ormandy was paid (inflation-adjusted) two million dollars per year.

I will simply say that this discussion misses the boat by continuing to discuss the arts (especially music) simply as an object, a commodity produced by an elite professional class for consumers. Consumerism and marketing are essentially directed to basic needs: food, clothing, shelter, transportation. As for the arts, on the other hand, addressing and reaching out to the intellectual and spiritual needs and desires of the individual is not so simple.

The problem is educational and experiential, at the grass roots level. Great art is sophisticated, and so your consumers will come from people sophisticated enough to understand your product. That means, at some level, however basic, they need to be taught to be artists themselves. This is not easy, but it’s the only way.

By analogy, it could be suggested that, if it weren’t for the regular practice and cultural prestige of sports and games at all levels of modern life, we would find the professional sports world in a similar marketing predicament.

One commentator above mentioned a plethora of opera houses in southern Germany. That’s a cultural community that is changing, but for the moment still clings to its traditions. Opera there isn’t just a local entertainment feature. It’s part of the fabric of their way of life, and it presupposes education and ongoing experience at some fundamental level.

Our schools and churches need to get on the ball, and our high-profile fine arts institutions, universities and conservatories are soon going to be lacking an arts constituency if they don’t seriously direct their attention to a practical arts education — especially in music — at the elementary and secondary level. Not lip service, but serious attention. Pops concerts, crossover concerts, run-outs to local schools, the occasional lecture-recital — these are okay, but they will not stop the bleeding. A discerning public is a well-educated one. Teach kids to be artists, and they will grow to understand it.

“By analogy, it could be suggested that, if it weren’t for the regular practice and cultural prestige of sports and games at all levels of modern life, we would find the professional sports world in a similar marketing predicament.”

Stephen, professional sports is already in that predicament. As we slowly move out of the age of broadcast media we’ll eventually see the large majority of revenue for sports dwindle. In fact, we’re already seeing signs of this now.

Michael Rushton

Michael Rushton directs the Arts Administration programs at Indiana University in Bloomington. An economist by training, he has published widely on such topics as public funding of the arts, copyright, nonprofit organizations and tax policy, and served as Co-Editor of the Journal of Cultural Economics. At IU he teaches Read More…

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What’s the price? Everything has one; admission, subscriptions, memberships, special exhibitions, box seats, refreshments, souvenirs, and on and on – a full menu. What the price is matters. Generally, nonprofit arts organizations in the US receive about half of their revenue as “earned income,” and … [Read More...]